RALEIGH, N.C. — State employees would have to stop smoking or lose weight if they want to receive more generous health benefits under a proposal presented to legislators Thursday.

The financial motivation for workers, retirees and their dependents to improve their health are contained in recommendations from North Carolina State Health Plan administrator Jack Walker to shore up the plan's finances. The plan last year discontinued its wellness program that gave merchandise to people who changed health habits.

"Money incentives in smoking work," Walker told told the Joint Committee on Employee Hospital and Medical Benefits, comprised of lawmakers that oversee the health plan. "Offering prizes is ineffective."

The proposal, included in a drafted bill that will soon be introduced in the Legislature, also would give an immediate $250 million cash injection to the plan so it can pay its claims this spring.

"Somewhere in the latter part of March, we will have insufficient funds to pay hospitals and physicians," Walker said. "We are concerned for our members and we are concerned for the providers."

The measure also would raise premiums for workers or retirees who insure their spouses or dependents by 7.3 percent annually for the next two years. For example, an employee or retiree who also enrolls their family would see their premium rise from about $489 today to $563 by July 2010.

The number of coverage tiers would drop from three to two and most deductibles and copays for doctor visits and prescription drugs would increase.

The changes would mean the Legislature would have to inject an additional $349 million in cash into the two-year budget beginning July 1. Two weeks ago, legislators were told they might have to find $1 billion over the next two years to cover claims without changes to the plan, which cover about 667,000 employees, retirees and dependents.

But the proposal's bottom line would mean higher premiums and eroded benefits.

"It ain't no good news," said Senate Majority Leader Tony Rand, D-Cumberland, a committee co-chairman. Rand said a bill needs to be passed by April 1.

The bill's biggest adjustment to the plan would directly link coverage levels to a person's weight or smoking habits.

Walker said the proposal reflects that the 70,000 smokers in the plan generate $2,000 in higher medical expenses than nonsmokers. Patients that are among the most obese in the plan have nearly $2,400 more in expenses than other people in the group.

"We have a rather large group, both literally and figuratively," Walker said. "Obesity is a growing issue."

As of July 2010, nonsmokers or people in a quit-smoking program would be able to receive coverage in the more generous of the two coverage tiers. The plan would set up a system to determine whether an enrollee doesn't smoke and beef up smoking cessation initiatives.

If one person in a covered family smokes, then the entire family wouldn't qualify and would receive the coverage with more out-of-pocket costs.

Smokers should pay their extra share of costs, said Ken Smith, a Department of Transportation worker who has smoked for about 10 years.

"I probably think that's fair," said Smith, 48, of Garner, holding a cigarette while walking on a downtown Raleigh street. "It just makes sense to me."

Wendell Powell, who works for the state as a detention officer, can understand the smoking issues, but not the obesity part of the proposal. He said the changes would only add to his stress of providing for his family in hard times.

“You have to eat quick,” Powell said. “Because I work two jobs…sometimes I can’t eat a healthy meal.”

Enrollees with a body mass index – a weight-height ratio that determines whether a person is considered overweight – below 40 can stay in the more generous plan as of July 2011 and below 35 as of July 2012.

For example, a person who is 6 feet tall and 294 pounds has a body mass index of 40. A person 6 feet tall and 258 pounds has an index of 35, according to a table presented by the health plan.

The 55,000-member State Employees Association of North Carolina supports the changes to promote healthy plan members, said Chuck Stone, a lobbyist involved in a health care advocacy group linked to the association.

"There should be an incentive for people to engage in healthy and good health practices," Stone said.

Stone said the proposal, which must be approved by the Legislature, still doesn't do enough to encourage young or healthy spouses of employees or family members to join the plan. Walker said he's working on a proposal to reduce premiums for workers and their spouses who are in their 20s and 30s.